The Trade Desk Has Forced Wall Street into a Recalibration CML

As of this quarter, it may have created the definitive unified system of collecting data for advertisers on the web, just as we opined.

The company reported earnings on 11-6-2020 after the market closed.

But the earnings release is simply a moment in time and our interest in the company is not for a day, but for the day it reaches the potential we see, which is a radical new advertising juggernaut powered by artificial intelligence that threatens even the walled gardens of Facebook and Google.

If there is one section to read from this dossier, it should be the one entitled “Snapshot.”

We added The Trade Desk to Top Picks on September 3rd, 2018 for $141.88.

As of this writing it is trading at $839.08, up 491%.

This entry date and price has been verified by the third-party audit firm Krost. Please feel free to visit their website.

Preface
The Trade Desk has (mostly) recaptured the growth it lost during COVID and the results where nothing short of astonishing.

The immediate stock price move was a reaction not just to good numbers, but a systematic recalibration by Wall Street of what this company is and what it can be.

We are satisfied with this recalibration and with the time it took — about two to five years is our goal when we add new Top Picks with respect to Wall Street “catching up.”

Please keep that in mind.

And we have said before:

While some of this may sound uncomfortable, it has always been the case that the best investments in the world for CML Pro have come not from running a sophomoric scan on a financial website and saying “hey, look, these are the ten fastest growing tech companies. Let’s buy those!”

While virtually every technology stock is up this year, this will not be the case forever.

Investors will either find underappreciated companies or they will not; and a scan of the past will not find underappreciated assets.

That’s our view, and why we so urgently press the idea of perspective in investing mindsets.

As for other sophomoric view of Trade Desk prior to the latest earnings release, we saw them in great abundance when Apple introduced the “opt in” requirement for cookie tracking.

Oh, how other analysts decried the move and how badly it would impact The Trade Desk.

We defiantly and obstinately took the stand that the impact for The Trade Desk would be the opposite — it would help the company grow faster because without cookies there would emerge an urgent need for some other data to help advertisers pinpoint ads.

And what do you know, we got this

Unified ID 2.0, [is] which now gaining industry-wide acceptance as a new standard to replace and improve upon third-party cookies.

You can learn more about this system here:
Unified ID 2.0.

“As the industry moves away from its reliance on the third-party cookie, there’s an opportunity to create a new and better approach to identity for the open internet.”

A mantra which states “don’t listen to noise,” is insufficient because it’s obvious.

The work is to figure out “what is noise.”

That work is left for the reader, but for me, this is Ophir speaking not Capital Market Laboratories, if it’s going to enter my cognition, the source should have at least 20 years of experience in finance, and if its on social media, it should be a verified account.

Anyway…

Earnings
The Trade Desk points to connected TV (CTV), also known as streaming TV, as its singular greatest growth avenue now and for the foreseeable future.

While Number one Spotlight Top Pick Roku grew revenue by 73% in Q3 (Sep 30, 2020) year-over-year in the face of COVID-19, The Trade Desk showed a revenue growth of 32%, but most notably, this was a turnaround from 13% revenue shrinkage (-13%) year over year last quarter.

This quarter was the beginning of a turnaround — a potential return to normalcy.

With The Trade Desk, Wall Street has infinite patience because analysts see what we see (finally).

The last quarter, the next quarter, this year, nobody cares. Nobody cares.

Wall Street is pricing in the future.

This market is going to be more volatile than any market we have ever seen in the history of the United States financial system.

It already is.

We had the worst December (in 2018) ever. Worse than the Great Depression.

We had the worst 35% drop (fastest) ever, due to initial reactions to COVID-19.

We had the fastest recovery out of a bear market ever.

All of that, is a precursor to what is a new market.

A market that is simply a reflection of unnatural disruptions and therefore will act unnaturally.

This is the only part of the market that is normal.

So, if you prefer, it’s normal that it is this unnatural given the surrounding influences.

But it will calm down after it doesn’t calm down.

It will get better after it isn’t better.

In the long-term, really, these quarterly notes, the price swings, they are all just conversation.

But I enjoy the conversations, so let’s have one about the marvel that is The Trade Desk knowing full well that we may well experience the most volatile market ever.

And then we won’t.

* Revenue: $216.1 million versus analyst expectations of $179.96 million for 32% growth.
This was a big beat.

We note that The Trade Desk has never posted revenue growth of less than 34% before the pandemic, so this is not the end of the recovery, it is the beginning.

* Adj EPS: $1.27 versus analyst expectations of $0.41.
This was one of those “recalibration” big beats.

That adjusted EPS numbers comes from adjusted EBITDA which rose 36% to $77.2 million vs. estimates of $33 million.
This was one of those “recalibration” big beats.

This indicates that TTD’s adjusted EBITDA margin widened from 29% in the year-ago quarter to 36% in the face of COVID.

* Next Quarter Revenue Guidance: $289 million versus analyst expectations of $250.54 million.
This was a big beat.

The Trade Desk is comparable to very few companies.

COVID-19 destruction aside, the company grew at 32% with an adjusted EBITDA margin at nearly 36%.

We don’t even have to imagine what TTD would look like when it turns profitable, it has been for several years.

The world of technology has a golden rule, called “the rule of 40.”

If revenue growth percent + EBITDA margin % in sum are over 40, the company qualifies for this rarefied air.

With The Trade Desk we see 32% + 36% = 68%.

There’s really no name for that other than… “recalibration to reality.”

More Details
In a world where brands now face the stark reality that if the invest in walled gardens like Facebook, they have no control what other content sits side-by-side with their company’s logo.

This has caused boycotts and generally shaken the entire advertising landscape, likely forever.

Brands now care. That’s it.

They will never “not care.”

The Trade Desk “provides the tools they need to buy only the premium inventory they want to support, and reach only the audiences they value” (Source: CEO Jeff Green).

As for CTV, try this:

* In Q3, despite the impact from COVID, CTV spend grew 100% from Q3 2019 to Q3 2020, up from 40% last quarter.

* Connected TV products account for 25% of overall sales.

Here is more from the CEO back in Q2:

As one leading CMO said to me a recently, and I quote, “I want to move as much budget from social to CTV as possible, as soon as possible.”And that’s not an isolated comment.

Advertisers are unified about this. They understand that data-driven advertising is a better place to measure performance and target key audiences.

This precisely what we wrote when discussing Roku.

Whether Wall Street “gets it” today, tomorrow, or in several years, it doesn’t matter.

Connected TV is going to eat not just all of linear TV, but a chunk of social media as well.

This revolution is happening.

It will not stop.

It is larger now due to COVID-19 than it would have been.

That is the CTV story.

That is the Roku story.

That is The Trade Desk’s CTV story.

There is no other narrative about this thematic that gathers any interest from us.

None.

The Trade Desk is growing in all of the right areas — the areas that we know to be the future, not just CTV.

* Mobile Video spend about 70%.
(Prior to COVID it was 74%.)

* Audio spend grew about 70%
(Prior to COVID it was 60%.)

* Connected TV spend grew about 100%.
(Prior to COVID it was 100%.)

Connected TV is the also called streaming TV or over the top (OTT).

About that Digital Transformation (DX)
You’re going to read these exact words many times this quarter, so here it is again:

The digital transformation (DX) due to COVID-19 is a permanent shift in the way technology is used by people, governments, and enterprises around the world.

E-commerce, by some measures, has moved forward by 10-years in the last 3-months.

While this virus is a tragedy, if it happened to us ten years ago, the death toll and economic impact would have been far (far) worse.

Due to breakthroughs in technology, our medical scientists can react faster and with greater precision in an effort to vaccinate this disease.

Due to breakthroughs in technology, individuals are able to use e-commerce for nearly everything.

Due to breakthroughs in technology, the Internet can thrive under immense and sustained traffic.

Due to breakthroughs in technology, enterprises can turn a DX project from three-years into a weekend.

For all the paranoia surrounding technology, make no mistake, due to breakthroughs in technology, lives have been saved, economies have been resuscitated, and the general world order has been preserved itself while pursuing the largest, most coordinated global cooperation in the history of mankind.

So, yes, technology companies that are empowering this change, that are enabling this change, will see their stock prices go up.

For the crew out there, that sits in incredulity at some of these stock prices, in our opinion, it would be incredulous if they didn’t rise this far this fast.

So, yeah, stuff is going to get weird in the stock market.

There has been an unnatural exogenous event that has had an unnaturally negative impact on human kind.

In response, governments are having to act in unnatural ways to combat an unnatural systemic and human risk.

It is the understanding that this unnatural disturbance requires an unnatural response that has created stability, for now, in the market.

The market will have an unnatural response to this unnatural disturbance and equally unnatural intervention.

It is going to get bumpy and the stock volatility to follow is the only part of this whole thing that is natural.

When the best investors in the world hear consternation about a stock price ‘on that day that time’, they don’t hear it.

It’s not a reluctance to it, it simply means nothing.

A day cannot encapsulate the changes that have already been laid.

This understanding that whatever the market does today has no impact on the view of the future has a name.

It’s called perspective.

The rare (rare) few have it.

It is these rare few that we call the best investors in the world.

It is this group of people that you can join, by making a decision.

You are the best investor in the world with perspective.

Don’t lose it.

Snapshot
While this section is an overview, within about 20 sentences and a few images, you should understand the basis of The Trade Desk’s (TTD) story.

Here we go.

The Trade Desk is an investment in the whole internet. Even during the oncoming recession and COVID-19 pandemic, that statement will remain true.

It is an artificial intelligence driven ad buying platform that serves its customers with what is now referred to as “programmatic” optimized advertising purchase tools and automation.

The shift to data-driven decisioning versus guessing or intuition is game-changing.

These changes in the landscape significantly benefit The Trade Desk.

The company openly states that it believes there is a shift in media that started about 9 weeks ago that is accelerating the move to data-driven advertising.

Nowhere is this more apparent than in Connected TV.

The Trade Desk is the largest aggregator of CTV ad impressions, across every major content provider.

The company has created a strategy, technology, and business model to take advantage of these shifts.

As a result, more advertisers are standardizing on The Trade Desk platform.

The Trade Desk is the guts to the digital advertising revolution — whether it be Facebook, Twitter, YouTube, Amazon, Roku, or almost any other firm – this company is playing a part in how the ad money gets dispersed.

Customers use Trade Desk to place every type of ad, including display (images and text), video, in-app (including social media), web, audio, and search (yes, search).

In addressing the thematics, the market size is enormous and in the early stages of yet longer-term growth.

Below is the old chart we used from Statista which shows programmatic digital display advertising spending in the United States from 2013 to 2019, in billions of dollars:

Look at the 2019 number that was projected because that chart has now been updated, and exactly as we surmised, the growth in programmatic ads has farexceeded the forecasts.

Notice that the projection for 2019 was $45.72 billion on a strong trajectory.

But the realized number was $59.45 billion, fully 30% higher than even that optimistic forecast.

And, while an $81 billion market in just one-year looks good (in the United States, alone), never forget the underlying trend, which is digital ads in general.

Here again we see an update to the original chart. This is the original (pay attention to the 2019 number):

And here is the updated chart:

The forecast went from $304 billion for 2019 to now $333 billion, nearly 10% higher than the already colossal number.

We have said many times, we are going to essentially throw away parts of 2020 and just shift some thematics forward a full year. It’s the trend that matters.

Friends, these two (updated) charts are the crux of the value proposition for The Trade Desk, and is a part of the crux of the value propositions for Roku and Pinterest.

It’s not just that the growth is coming, it is that the market does not fully appreciate the thematic and its trajectory and we have the empirical data to defend that statement.

This is why we built CML Pro — to show these charts not just as a retrospective in an intellectual capacity (no thanks), but rather after an investment has been named so we can benefit from that retrospective.

The entire digital advertising world is on its way to eclipsing an astounding half a trillion dollars by 2023 and programmatic is likely going to take a growing share of that already growing market.

The market size is enormous and in the early stages of yet longer-term growth.

The rest of news that will come out for The Trade Desk — all of it, is just conversation.

You have your story for the next five to ten years.

As a reminder, we spoke one-on-one with CEO Jeff Green on 1-16-2019 in the dossier One-on-One CEO Interview: The Trade Desk. We’re going to try to arrange something with him and Tiernan again. You’ll know when we know.

Risk
We do note concentration risk of large customers: In the 2018 Q2 10-Q, TTD listed two customers that account for more than 10% of gross billings. Since the language is pretty dense, we’ll just copy and paste it below:

We had approximately 742 clients, consisting primarily of advertising agencies, as of December 31, 2018. Many of these agencies are owned by holding companies, where decision making is decentralized such that purchasing decisions are made, and relationships with advertisers, are located, at the agency, local branch or division level. If all of our individual client contractual relationships were aggregated at the holding company level, Publicis Groupe and Omnicom Group Inc. would each represent more than 10% of our gross billings for 2018.

We also note that while the mega players like ad spends from everywhere, they prefer to control it themselves. But, much like Roku’s incredible marketplace that it just built (from where TTD buys), not being the giant is an advantage here.

For a full review of the risk, we direct you to the original Top Pick dossier
New Top Pick – The Pick-Axe to Technology’s Crown Jewel

Finally, we note the risk of COVID-19.

Obviously, we cannot measure the risk if the company itself cannot guide even two quarters forward.

In truth, none of us know how bad this could be. That’s just a matter of fact.

Conclusion
It takes cognition from the outside world, after CML Pro, for these companies to become great investments.

We maintain our rarefied status on The Trade Desk as the number 5 SpotlightTop Pick.

The author is long shares of companies discussed in this dossier, ROKU, TTD, as of this writing.

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